College Aid Not Helping Students

An Education Policy Reading List

Prepared by Neal McCluskey

Federal student aid intended to help people afford college may ultimately be self-defeating, enabling schools to raise their prices at breakneck speeds, cut their own aid programs, or encouraging states to restrain higher education appropriations. Especially because most schools are officially nonprofit, and everything they spend they call "costs," it is difficult to prove empirically that they might be raising prices because they can, not because they must. Still, the studies below find that in one way or another funds from government aid programs are often being "captured" by someone other than the students they are supposed to help.

For-profit schools that offer similar programs, but one is eligible to receive students with federal aid and the other is not, tend to have price differences roughly equal to the value of grant aid and loan subsidies.

Public colleges do not appear to raise their in-state prices in response to Pell Grant increases, but they increase their out-of-state rates, and private colleges raise their tuition, on roughly a dollar-for-dollar basis.

States reduced appropriations to public two-year colleges in response to the introduction of the federal Hope Learning Credit and Lifetime Learning Tax Credit. Some evidence that public two-year colleges raised their prices beyond just compensating for cuts in state spending.

In response to state HOPE scholarships, colleges in Georgia, especially private institutions, raised their charges and reduced institutional aid. In the worst case, some private colleges appeared to capture 30 cents of every aid dollar.

Private institutions increase institutional aid and tuition revenues in response to federal grant and loan increases. Public institutions appear to raise tuition revenues and decrease institutional aid in response to grants, but have no response to loans.

An increase in federal grant aid leads to an increase in institutional aid and no price increase at private institutions, but public institutions appear to raise tuition by $50 for every $100 increase in federal grant aid.